Stories from the stock market: Tales of money, mistakes and regret

Stories drive the stock market. Stories evoke fear, passion and excitement which influence human behavior. Stories can also have two different viewpoints, and the storyteller gets to decide how they will spin their story. The media knows dramatic stories drive sales whether it is news, sports or finance. People make emotional investment decisions based on stories without sifting through the facts or using past experience. This leads to mistakes, lost money and regret.

The Stories of 2016

The beginning of the year ushered in the story of China and the slowing global economy. This was not a new tale and the overall impact on U.S. companies has been vastly overstated. China’s economy has been slowing for several quarters now.  The trajectory of that slowing has not changed over this time period. The wording of the story also matters. Although China has a slowing economy, it still is growing at three times the pace of the U.S. economy. Perhaps the story should be China’s economy is maturing from an emerging market to a developed market which produces growing pains. However, that story does not produce the fear needed to maintain viewership and sell newspapers.

As the markets remain volatile, the media continues to tell an ongoing anecdote about oil. Interestingly, the tale used to be about the stock market increasing as oil decreased in price. A reduction in the price of oil made it cheaper for companies to produce and transport goods and services. This increased the bottom line. Furthermore, the consumer was paying less money at the pump which provided more money in the pockets of Americans to spend.

As a result, lower oil prices were positive. Somehow, this story was flipped in a very short amount of time. Low oil prices are now negative and the stock market is correlated to the price of oil. Again, telling a story about oil sinking to the lowest price in over a decade and the negative effects on the energy industry produces fear, passion, and excitement which sells advertisements.

The stories of 2016 are being told as they happen. Markets return to equilibrium based on numbers and the stories are retold with the facts. There will always be a story that affects the markets and the media is always going to tell it in dramatic fashion. It is up to investors to process the information and make informed decisions.

Tales from the Past

Intensive studies about the psychology of investors shows that people don’t recall specific times when they made money through the markets but remember distinctively when they lost money. Investors also tend to be overconfident and do not want to remember (or don’t realize) when they made mistakes. These factors lead to investors with a distorted story of their own experience which leads to irrational and emotional decisions with their portfolio.

My story about an investor has played out many, many times since the beginning of this year. We’ll call this investor Joe. In 2007, Joe became overconfident and had a portfolio which was much more aggressive than his goals and risk tolerance supported. The market started to decline over the summer of 2008 and crashed by the time the leaves started to change. He understood that markets go through cycles and was determined not to panic. Unfortunately, he just couldn’t stand it anymore and decided to pull his money out of the stock market in the spring of 2009. Joe had successfully locked in a horrendous return at the bottom of the great recession.

After the trauma of losing a third of his portfolio, Joe was very tentative to enter back into the stock market. In 2014, Joe’s best friend had been telling him how much his own portfolio had been increasing. Of course, a friend with no financial background was the best place to get investment advice. Joe decided to invest back into the markets at this time. Now after two corrections in the stock market in the last 6 months, Joe is ready to pull money out of the market again. As this story merges into the present, it is still being told.

The lesson to this fable is to take a step back and understand the mistakes and successes made in the past. Each investor has their own story and must learn from past experiences. It is not easy to make decisions when emotion is involved and money evokes emotion. Investment decisions must be made on facts and experience. Investment decisions should not be made on dramatic media coverage or advice from friends and coworkers.